Investors demand high standards

The nation’s $1.4 trillion super industry has warned Australia’s biggest companies to raise their governance standards after the News Corporation scandal, threatening to pull their investments if their demands are not met.

Several large superannuation funds met in Melbourne yesterday to consider the implications of the ­scandal and warned that directors and chief executives must be held responsible for what occurs inside an organisation.

“For shareholders, the buck has to stop with the CEO or the chair and
Rupert Murdoch
is both," said Ann Byrne, chief executive of the Australian Council of Super Investors (ACSI), whose funds represent more than $300 billion. “Issues which shareholders have raised over a whole range of governance risks have once again proved to be material to the value of a company."

The warning came as Prime Minister
Julia Gillard
said that
News Corp
in Australia had some “hard questions" to answer about its local operations.

Her comments triggered an immediate reaction from the group’s Australian chief executive,
John Hartigan
, who described the Prime Minister’s comments as “unjustified and regrettable".

The opposition communications spoke­s­man,
Malcolm Turnbull
, defended Mr Murdoch, and criticised calls for an investigation into the local media.

Representatives of the superannuation industry said there had also been talks under way with overseas pension funds on a co-ordinated approach to News Corp’s annual general meeting in October this year.

The talks came after one of News Corp’s largest shareholders, the $US237 billion ($221 billion) California Public Employees Retirement Scheme warned it was considering its options and did not intend to be a passive spectator of the scandal.

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The super funds are concerned over the independence of the News Corp board and are calling for an overhaul of directors.

“It seems that the board were compliant and didn’t ask Rupert any probing questions. That is not the role of the board," Ms Byrne said.

“There should be a separation of the CEO and the chair and there should be a proposal from the company about a transformation of the board."

“This is about boards being independent and related party transactions," she said.

In 2004, ACSI campaigned against News Corp relocating its operations to Delaware amid concerns that corporate governance standards would deteriorate.

In the company’s most recent annual report, News Corp released a related-party disclosure document of more than 6000 words, ACSI said.

Ms Byrne said the fallout was being used by the industry to consider broader investments on the Australian Securities Exchange.

“What came out of the meeting was that this example can be used as a way to have discussions with fund managers to ensure that they do in fact assess governance risks," she said. “There are a number of practical examples which people are starting to use, such as BP."

The chairman of CareSuper, Michael O’Sullivan, said he did not believe most fund managers had priced in the corporate governance risks to News Corp, despite warning signs over several years.

Four years ago, News Corp shares hit a high of $32 but finished yesterday at $15.24, up 74¢ on the day.

“The situation is still unresolved and the damage is still ongoing," Mr O’Sullivan said.

“You have got the dominant CEO / chairman which is always a danger sign as it was with HIH and ABC Learning Centres," he said.

Mr O’Sullivan said that while super funds engage fund managers to make investments on their behalf, super funds can apply pressure to have fund managers take corporate governance risks more seriously.

“There are a number of fund managers who still just pay lip service to it," Mr O’Sullivan said.

Amanda Wilson, managing director of Regnan – which represents superannuation funds that invest more than $53 billion – said they had rated News Corp zero out of five on corporate governance for the past several years.

“These are issues which need to be factored into an investment decision because we think they genuinely have an impact on long-term value," Ms Wilson said.

The News Corp board is made up of 16 directors, of which nine are independent directors. Several of these have no media industry ­experience.

“Fundamentally, we believe the company has been run as a fiefdom, rather than for majority shareholders," Ms Wilson said.

“I think Rupert has to go," she said. “Things start to rot from the top and [Mr Murdoch leaving] would send the right signal to investors."

The decision to examine investments in News Corp is seen by some in the industry as the logical next step given the damage to the company’s brand and share price

“I’m not surprised," said one super fund director. But the director said if there was a large scale sell-off of News Corp shares, this could depress the price and pose fiduciary duty questions for a board in terms of protecting members’ investments.

“They could also be accused of being ideological in their investment decisions rather than acting on what is good for their members," the director said.

It could also be hard to mount an argument that News Corp was an unethical investment like tobacco or arms manufacturers may be, he said. “News Ltd is not nuclear, you can’t claim it is totally unethical, it doesn’t make bombs," the director said.

“What is unethical in investing in a newspaper? Where does it end? You can’t invest in companies that don’t employ 50 per cent women?

Corporate governance expert Dean Paatsch said the unique governance structure in the United States had protected Rupert Murdoch.

“For me, the governance issue for News Corp is actually the board. In the US, you cannot simply vote off a director, so they can do what they want," Mr Paatsch said. “As an Australian listed company, you would have simply been able to vote the directors off.

“News Corp are really a governance Frankenstein in that sense. As long as the head stays the same, the body around it stays intact."

The debate comes after media mogul Mr Murdoch faced a horror day of tough questions and angry protesters at a British parliamentary inquiry.

Mr Murdoch used the inquiry to apologise to the British public and said the News of the World had failed to hold itself to account.

“This is the most humble day of my career," he said. “I feel that people I trusted . . . have let me down and I think they behaved disgracefully, betrayed the company and me."

But he also ruled out resigning from the company and said he was not responsible for what happened.

“It’s for them to pay," Mr Murdoch told the inquiry. “I think that frankly I’m the best person to clean this up."

Comedian Jonathan May-Bowles shocked proceedings when he tried to hurl a plate of shaving cream at the News Corp chief executive and had to be led away in handcuffs.